Financial Management Coursework: Investment Appraisal and Analysis

This report provides a comprehensive financial analysis of Dovolenka Glam Plc, focusing on investment decisions related to Dovolenka Land. It uses NPV, MIRR, and duration appraisal techniques to assess the viability of the investment, concluding against it based on negative NPV and other factors. The report also identifies other critical information for decision-making, such as risk scores, non-financial criteria, and regulatory considerations. Furthermore, it evaluates the benefits of diversification for DGP and assesses the impact of technological developments in financial markets, including cloud computing, big data analytics, and blockchain technology. The report also estimates the cost of equity for GreatFlight using the Capital Asset Pricing Model and the potential value using the Free Cash Flows to Equity method, discussing the limitations of these methods and comparing growth by acquisition versus internal investment. Desklib offers more resources like this to aid students in their studies.

Assignment
Dovolenka Glam Plc
2.2 Questions
(a) Analyse and advise whether or not DGP should undertake the investment in
Dovolenka Land using the NPV, MIRR and duration appraisal techniques. All
the workings are expected to be included in Appendices.
DGP should not carry out the proposed investment on the basis of the following
grounds:
(i) Net present Value is negative (refer Appendix -1)
(ii) Modified Internal Rate of return is 1% (refer Appendix-2)
(iii) Duration exceeds 3 years (refer Appendix-3)
1

Appendix-1 & 2
Sl no articularsP earY 0 earY 1 earY 2 earY 3 earY 4 earY 5
erminalT
Value inalF
1 nitial payment of landI -250000000
-
250000000
2 o of ickets soldN T 6120000 6120000 6120000 6120000
3
o of ickets sold toN T
Adult 2142000 2142000 2142000 2142000
4
o of ickets sold toN T
children 3978000 3978000 3978000 3978000
5 rice of ti cket for AdultP 20 20 20 20
6
rice of ti cket forP
Children 12 12 12 12
7
a deduction forT x
market research 46000
8
Revenue from ti cket sold
to Adult 45008775
46133994.
4 47287344
48469527.
8
9
Revenue from ti cket sold
to Children 50152635 48929400 48929400 48929400
10
Revenue from food and
drink 64298250 62730000 62730000 62730000
11 Cost of food and drink
-
41793862.5 -40774500
-
40774500 -40774500
12
Revenue from gift and
souvenier 45008775 43911000 43911000 43911000
13
pense of gift andEx
souvenier
-
22504387.5 -21955500
-
21955500 -21955500
14 Maintenace penseEx -15000000 -19000000
-
23000000 -27000000
2

Sl no articularsP earY 0 earY 1 earY 2 earY 3 earY 4 earY 5
erminalT
Value inalF
15 Annual insurance cost -2101250
-
2153781.3 -2207626
-
2262816.4
16
isting eneralEx G
overheads -2626562.5
-
2692226.6 -2759532
-
2828520.5
17 staff e pensex -42025000 -43075625
-
44152516 -45256329
18 orking capital outflowW -55000000
19
After ta realisable valuex
of non current asset 250000000
20 Depreciation note( 1) -125000000 -93750000
-
70312500 -52734375
21 et fl ow before taN x -249954000
-
305000000
-
34342595.5
-
9457206.4
9935602.
6
23467919.
4 250000000
22 aT x 0 0 0 0
23 orking capital inflowW 55000000
24 et nflowN I -249954000
-
305000000 90657404.5
84292793.
6 80248103
76202294.
4 305000000
25 Discounting Rate 7.15% 7.15% 7.15% 7.15% 7.15% 7.15%
26 et present ValueN -249954000
-
284647690
78958606.5
8
68514854.
3 60873344
53945911.
3 215918734
-
56390240
27 M RRI 1%
Depreciation Schedule
Sl no articularP Amount
1 pening balanceO 500000000
2 Depreciation in earY 2 125000000
3 Closing Value in year 2 375000000
4 Depreciation in earY 3 93750000
3

Sl no articularP Amount
5 Closing Value in year 3 281250000
6 Depreciation in earY 4 70312500
7 Closing Value in year 4 210937500
8 Depreciation in earY 5 52734375
9 Closing Value in year 5 158203125
10 Sale procceeds 250000000
11 rofitP 91796875
Appendix -III
Computation of duration of project
Sl NO ime periodT Cash fl ow Cumulative Remark Discounted Cash fl ow Cumulative Remark
1 0 -249954000 -249954000 -249954000 -249954000
2 1 -305000000 -554954000 -284647690.2 -534601690
3 2 90657404.5 -464296596 78958606.58 -455643084
4 3 84292793.56 -380003802 68514854.32 -387128229
5 4 80248102.6 -299755699 60873344.22 -326254885
6 5 76202294.37 -223553405 53945911.25 -272308974
7 erminal ValueT 305000000 81446595 reater than yearsG 5 215918734 -56390240 ever paidN
81446595.03 ]
articularsP Rate eightW etN
Cost of Capital proposed Strategy( )
Cost of debt 5.8 35.60% 2.0648
Cost of equity 7.9 64.40% 5.0876
7.1524
4

(b) Identify and discuss what other information would be useful to DGP in making
the investment decision.
The critical factors that would be important in decision making includes:
(a) Organisation defined risk associated with the project i.e. Risk Score
(b) Criteria which are non-financial in nature like satisfaction of customer, retention of
employees;
(c) Alignment with the vision of the company;
(d) Availability of suitable site location;
(e) Competitors strategy and profitability;(Anon., n.d.)
(f) Government rules and regulation and approach towards to themed parks;
(g) Safety issues;
(h) Environmental Constraints;
(i) Tax incentives if any;
(j) Availability of qualified personnel;
(k) Impact on other business of the company;(Anon., n.d.)
(l) Permission from required authorities etc.
(c) Critically evaluate the benefits for DGP of the proposed diversification and
comment on the views expressed by the CEO (Klaus Worryington).
The benefits of diversification to DGP shall include:
(a) Minimisation of risk of loss as if one business fail company can look at other. In
other view, loss from one can be offset form the profit of the other.(Johansson,
2017)
(b) It provides security and stability to the company;
(c) Creates employment opportunity and increases turnover and corporate image of the
company;
(d) Create scope for further revenue generation and maximisation of stakeholder
wealth;
(e) In alignment with the long term vision of the company.
The views expressed by Klaus Worryington are in alignment with the benefit of
diversification as diversification always results in maximisation of wealth and reduces
corporate risk of failure on account of changing business times. Further, the
diversification maximises stakeholder wealth. On account of increase in stakeholder
wealth, the company corporate image shall increase.
(d) Provide an assessment and evaluation of the specific points raised by Lesley in
relation to technological developments in the world financial markets. You should
focus on the following topics in particular:
i. Cloud computing
Cloud Computing can be described as a means to efficiency, flexibility and savings in
cost all bundled in one.
5

The benefits showered by cloud computing is highly touted. It allows users to have
access to a range of virtual computing solutions encompassing network-accessible data
storage, software development environment to a full-fledged application.(Mishra,
2016)
In order to analyse the benefits of cloud computing, a financial user must understand
the impact of implementing different models of cloud computing system. A write blend
of cloud model is must. (Anon., 2015)The cloud computing shall offer the following
advantages:
(i) Improvement over existing premise systems;
(ii) Streamlining of Finance functions;
(iii) Cost reduction;
(iv) Efficiency is business problem solutions;
(v) Off premise function;
(vi) Can work under distributed environment, for instance shared services, local finance
to end –to–end process.
(vii)Core financial Management
ii. Big data analytics
The entire financial service industry depends on market intelligence. Any technology
that provides a head front is a gold to the company. The big data ensures chances of
procuring more customers aboard. The Big data helps in understanding customer data,
measurement of risk, expectation of market and operating efficiency.
In terms of data reported by Price Waterhouse Coopers, the size of big data at present is
USD 53.4 billion and is constantly growing. Further, it should be looked as valuable
business tool. Big Data provides advantages in the following three areas:
a( ) Monetizing data of customers: Big Data helps in analysing customer risk, need and
preferences. They keep institution on track with satisfaction of customers as
priority. It also helps to gauge the reason for loss of business in the past and avoid
any such mishap in future.
b( ) Developing models which are predictive for transactions and operations: They help
in disclosing the need and preferences of customer. For instance What product
appeals most to customer?. It helps to analyse the sentiment for new product and
services. (Anon., n.d.)
c( ) Reporting to regulatory and risk management optimisation: In today world,
financial firm needs to manage risk under multiple dimensions. Big data helps
companies to assess real time data streams such as news, research etc. It further
combines regulatory data with document, supporting material and contracts. It helps
in better regulatory risk management.
Thus, depending on need of the institution, Big data can be of great help for growth and
success of the organisation as seen in the benefits detailed above.
iii. Blockchain technology.
6

Before detailing the benefits of block chain in financial industry, one needs to properly
understand the mechanism of blockchain. A blockchain is a public digital ledger that
can be verified by anyone. The ledger has been distributed globally across network of
computers and devices. Further, there is no central authority to add new transactions to
the ledger. (EYGM Limited, 2016)It is a highly secured mechanism. Block Chain shall
provide the following advantages to financial institutions:
(a) Cheaper Banking as it insures distributed database;
(b) Delivery of statutory, management and regulatory reporting;
(c) Transparency of intercompany transactions;
(d) Reconciliation of transactions;
(e) Maintaining standards of financial data;
(f) Ensuring accuracy of source system;
Despite, the aforesaid advantages, the technology can still be delayed on grounds of
scalability, novice and amateur technology, costly as cost of migration from legacy
finance systems.(Dale, 2018)
Dovolenka Fly Plc (see Appendix 2 for Details)
(a) Estimate the current cost of equity for GreatFlight using the Capital Asset Pricing
Model. Discuss any assumptions that you have made. All the workings are
expected to be included in Appendices
Dovolenka ly lc DF P ( FP)
Sl
NO articularsP Rate
1 ong erm rowth rateL T G 4%
2 Current Rate of rowthG 6.30%
3 rowth continuityG years5
4 quity etaE B 1.45
5 Risk ree RateF 3%
6 quity Risk remiumE P 7%
7 revailing Share priceP p290
8 ratioP/E 10
9 Cost of quity in terms of CA ME P 13.15%
The cost of Equity is 13.15% on the basis of the formula of Capital Asset Pricing
Model(CAPM) i.e. Risk free premium+ Beta( Retrun on market- Risk free premium).
Thus, the return required is 13.15%.
The assumptions of the Capital Asset Pricing Model being an additive model include:
(A) The quantity of asset is given and fixed;
(B) Investor are rational and risk-averse;
(C) Investment has been diversified broadly;
(D) Investors are price takers i.e prices cannot be influenced;
(E) Unlimited lending and borrowing can be done at risk free rate;
7

(F) There is no transaction or taxation cost;
(G) Securities are highly divisible into smaller parcel;
(H) Expectation are homogenous;
(I) Market is efficient and all information is available to investors.
(b) Estimate and advise on the potential value of GreatFlight using the Free Cash
Flows to Equity (FCFE) method. Explain the limitations of all the methods you
have used and comment on the value computed. All the workings are expected to
be included in Appendices.
The potential value of equity of Great Flight has been computed here-in-below based
on the data provided in Appendix-II:(CFI Education Inc. , n.d.)
Sl
NO articularsP Amount in Million pounds'
1 et cash fl ow from operating ActivitiesN 210
2 Capital penditureEx -120.2
3 Debt Repaid -31
4 et interestN 1.5
5 a ationT x -4.1
6 Decrease in short term deposit 35.5
7 ree cash fl ow to quityF E 91.7
8 Cost of equity 13.15%
9 Current rowthG 6.30%
10 ong erm rowthL T G 4%
11 Valuation using Current rowthG 1338.7
12 Valuation using ong term rowthL G 1002.19
Assumptions Undertaken
(i) Interest received is a part of net cash flow from operating activity;
(ii) Interest paid is a part of net cash flow from operating activity;
(iii) Interest element is a part of net cash flow from operating activity;
(iv) Taxation is a part of cash flow from operating activities;
(v) Proceeds from sale of JV is not a part of FCFE;
(vi) Increase / decrease in short term deposit is a part of net cash flow from operating
activity;
(vii)Increase / decrease in cash is a part of net cash flow from operating activity.
(viii) Cash flow computed is inclusive of growth.
The value computed on the basis of above methodology is Pound 1338 Million with
current growth rate and Pound 1002.19 with long term growth rate. However, the
market cap of the company is lower than the competitor based on above computation.
(c) Discuss the advantages and disadvantages of growth by acquisition as compared
with growth by internal (organic) investment.
Growth by acquisition and diversification is known as external growth or inorganic
growth while internal growth is known as organic growth.(Devenport, 2016) The key
advantage and disadvantage of external growth has been detailed here-in-under:
8

(i) Growth take place in a short tenure of time;
(ii) Quick changes is business to adapt to market changes and change in technology;
(iii) Impact in market size and quick add to sales;
(iv) Ambitious growth can be executed by acquiring a fast growing company;(soulsby,
2017)
(v) Expansion in asset;
(vi) Advantage of expertise personnel through acquired business.
The disadvantages have been detailed here-in-under:
(i) Change in management style, business culture and ethics;
(ii) Risk of failure of acquired business;
(iii) Financing through debt can increase cost of capital of company;
(iv) Difficult to maintain such growth;(soulsby, 2017)
(v) Lack of control as synergy cannot be estimated with 100% precision;
(vi) There might me employee’s retrenchment.
Dovolenka Garden Ltd (see Appendix 3 for Details)
(a) Estimate the expected outcomes from hedging using:
i. Interest rate futures;
ii. Interest rate options; and
iii. Forward rate agreements.
You must show the outcomes assuming that LIBOR interest were both to increase
by 0.5% or decrease by 0.5%. Comment on the results and advise on the best
hedging option. In the futures hedge, the expected basis at the close-out date
should be estimated but basis risk may be ignored. In the options hedge, you
should show the outcomes for all the multiple options available. All the workings
should be included in Appendices
articularP Amount in oundP
Mio ime period in monthsT
emporary acilitiesT F 55 5
RLIBO 4.10%
Spread 1.35%
oan rateL 5.45%
uturesF Amount in
oundP o of contracts requiredN o oN F
lots
Contract Size 500000 110 5000
ick SizeT 0.01%
ick ValueT 12.5 1375
Value in December 96.05
Value in March 95.76
Value in uneJ 95.54
Contract Value inDecember 52827500 Sell contracts as we fear
rising interest
Contract Value in march 52668000
9

uturesF Amount in
oundP o of contracts requiredN o oN F
lots
Contract Value in uneJ 52547000
rofit in juneP 280500
rofitP % 0.53%
cessive interest R riseEx ( LIBO
by i0.5%) ( ) 45833.3
Reduced interest R fall by(LIBO
0.5%) (II) 45833.3
rofit nder scenarioP U 1 23466.7
rofit nder scenarioP U 2 326333..3
Options
ptionsO Amount in
oundP o of contracts requiredN o o lotsN F
Contract Size 500000 110 50
ick SizeT 0.01%
ick ValueT 6.25 687.5
-A Call
(Long)
Decemb
er uneJ rofit loss perP / ( )
unit
rofit loss perP /( )
lot
rofit ossP /(L )
overall
-9400 1.505 1.67 0.165 8.25 412.5
-9450 1.002 1.17 0.168 8.4 420
-9500 0.502
0.68
5 0.183 9.15 457.5
-9550 0.252
0.28
5 0.033 1.65 82.5
-9600 0.002 0.07 0.068 3.4 170
-PUT(Sell)
-9550 0.06
0.16
5 0.06 3 150
-9600 0.2 0.71 0.2 10 500
The calculation has been done on the basis of following assumption:
(a) The size of option is 10000 pound thus for 55 million there are 5500 options.
(b) The profit has been computed based on the same methodology.
10

Forward Rate Agreement
orward Rate AgreementF 5.85%
Scenario -1
cessive interest R rise by iEx ( LIBO 0.5%) ( ) 5.95%
Cost to Company reduced by rofit0.1%, P 9166.67
Scenario -12
Reduced interest R fall by(LIBO 0.5%) (II) 5.05%
Cost to Company increased by rofit0.8%, P -73333.33
(b) Discuss the advantages for DGL of having a specialist centralised treasury
department.
The advantages of having a specialist centralised department of treasury includes:
(i) Management of foreign currency becomes easier;
(ii) Rate of interest on investment may be attained at a higher rate on account of large
pool of cash available;
(iii) The likelihood of making profit is higher as treasury department shall function as
profit centre;(Anon., n.d.)
(iv) Borrowing of group can be attained a lower rate on account of centralised function;
(v) Level of money maintained as buffer shall be reduced on account of centralization;
(vi) Expert employees may be hired to manage resources.
11

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